The practice of dividing a company’s shares to lower the per-share price is called a stock split.
In a stock split, a company increases the number of outstanding shares while reducing the price of each individual share proportionally. For example, in a 2-for-1 split, an investor holding 100 shares receives 200 shares, while the market price per share is approximately halved. The investor’s total value is unchanged immediately because the number of shares and the price move in opposite directions.
A stock split does not, by itself, change a company’s market capitalization or the underlying ownership percentage of each shareholder. Companies may split shares after a strong rise in their stock price to make the quoted price appear more accessible and to encourage trading. Some investors also interpret a split as management’s confidence in future growth, although it does not guarantee better performance.
The opposite action is a reverse stock split, which combines shares and raises the per-share price. A stock split is also different from a stock dividend, share buyback or rights issue. Common split ratios include 2-for-1 and 3-for-1.